Could partnerships between corporations and private real estate investment funds make for a win-win?
Across the nation, corporations are struggling to meet the numerous economic and other challenges presented by the COVID-19 pandemic. At the same time, private real estate investment funds have dry powder to spare and are in the hunt for real estate investments. Taken together, they comprise a potential partnership ideally “built to suit” the current economic situation.
Many corporations own real estate, including retail stores, office buildings, service centers, industrial facilities and distribution centers. Due to the COVID-19 pandemic and the resulting negative economic impact therefrom, many corporations are currently struggling to earn income from the use and lease of those properties to service any debt on the properties or to generate a profit. As a result of the pandemic, real estate values in some sectors are down by as much as 25 percent in the last six months, vacancies are up by almost 15 percent in other sectors (and likely to increase) and dozens of companies have filed for bankruptcy, with even more expected to file by year-end. Hard-hit corporations will be hard-pressed to turn the corner without enough liquidity to run their businesses.
Meanwhile, private real estate investment funds[1] have been raising capital at a record-setting pace in recent years. Real estate fundraising exceeded $150 billion for the first time in fiscal year 2019, and private real estate investment funds held an estimated $300 billion ready to invest in real estate, as of the end of 2019. Nearly half of those untapped funds have been allocated for distressed and opportunistic investments, and those types of investment opportunities currently abound. An officer at one real estate investment firm has characterized the real estate investment opportunities arising out of the pandemic as “one of the greatest buying opportunities of the century” for real estate investors.
Could partnerships between corporations and private real estate investment funds make for a win-win?
Corporations typically engage in a wide variety of transactions with respect to their real estate properties and assets, including acquisitions, new developments and dispositions. Certain of these transactions, particularly acquisitions and new developments, can be capital-intensive. Corporations may not have a large amount of capital available to use for such purposes, particularly now. Corporations can obtain debt financing from private real estate investment funds for such purposes (and, for those corporations with a reasonably stable credit profile, on potentially attractive economic terms that may not be available to them from traditional bank lenders). There are a number of traditional bank lenders who’ve lost their appetite for real estate loans. Bank lenders are more risk-adverse. Some are overly concentrated with loans in the real estate sector. Others are prohibited by internal policies from extending additional real estate loans, for now. Many are constrained by regulatory and capital retention requirements. Private real estate investment funds aren’t subject to these same constraints. Their investors still have a healthy appetite for real estate investments, particularly in times of uncertainty and distress.
Additionally, corporations under economic distress may have few available options to generate short-term liquidity to get them through the pandemic. Corporations that own real estate, particularly in suburban markets, may be able to lease or sell and lease back their properties to generate liquidity. Such transactions can be attractive to investors in private real estate investment funds, since they can minimize risk (particularly in triple-net lease arrangements, where the tenant pays all real estate taxes, maintenance, repairs and insurance costs on the property in addition to rent), provide long-term stable source of revenue (typically over 10- to 20-year lease terms) and generate a potentially high rate of return on investment. There are some private real estate investment funds (including REITs) with investment strategies that are entirely focused on sale/lease-back arrangements, with billions of dollars of dry powder ready to deploy.
Partnerships between corporations that own real estate assets and private real estate investment funds are ideally situated for the current economic situation. Many corporations have the need, now more than ever, to monetize their real estate assets. Real estate investments funds have capital looking for these investments. Corporations and private real estate investment funds alike would be well-served to consult with counsel experienced in both asset-level real estate transactions as well as fund financing, regarding potential ways to structure transactions. Experienced counsel can help negotiate desirable terms to achieve the objectives of both the corporation and the investment fund, alike, as well as maximize tax advantages, minimize legal risks, and ensure maximum efficiency from transaction inception to completion. While these are challenging times, those in the real estate sector can be assured that there is plenty of money available for corporations who need it and more opportunities than ever for private real estate investment funds to make profitable investments in high-quality real estate assets.
About Duane Morris
Duane Morris Real Estate attorneys in the firm have represented corporations in all manner of real estate financings, and also represented private real estate investment funds and lenders to those funds, in structuring, restructuring, negotiating and documenting transactions to achieve a wide variety of objectives. These objectives include generating liquidity, providing capital for capital-intensive projects, bridging timing gaps in cash flows, leveraging assets and investments and more. In the past few months, we’ve seen a particular uptick in the volume of real estate and financing transactions, particularly distressed, opportunistic and sale/lease-back transactions.
For More Information
If you have any questions about this Alert, please contact David B. Yelin, Anastasia Kaup, any of the attorneys in our Real Estate Group, any of the attorneys in our Private Investment Funds Group or the attorney in the firm with whom you are regularly in contact.
Notes
[1] As used herein, “private real estate investment funds” are defined as privately-held entities (typically limited partnerships) that facilitate investments by high-net-worth individuals, sovereign wealth and governmental investors, and institutions such as pension funds, in debt and equity holdings in real estate properties and assets. Such funds typically invest in a diversified portfolio of real estate assets that may include commercial, industrial, office, hotel, retail, warehouse and multifamily properties that meet certain criteria, depending on the specific investment mandate of each fund.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.